The Achilles Heel Of Reform: Risk Adjustment Mechanisms

The Dutch government, who have a history of “managed competition” among for-profit health insurance companies, called the lack of well-designed risk adjustment mechanisms the Achilles Heel of a health care system. In their system, over half of all money spent on health insurance is redistributed as part of risk adjustment. Without it, insurance companies would compete primarily by trying to drive away unhealthy customers, instead of by trying to provide higher quality plans, better consumer service, or lower prices. Without robust risk adjustment and regulations, it is impossible for an insurer to provide high quality, low cost coverage. It would soon be overwhelmed with unprofitable, less healthy customers.

The CBO and CMS conclusions about what the lack of sufficient risk adjustment mechanisms in the House bill would do to the public option should be a wake up call. They concluded that the new public option would be forced to charge higher premiums because of the serious problem of adverse selection. But the public option can be a stand in for any insurer that tried to be socially responsible, be it a private company, public entity, non-profit, or new insurance co-op. Any “well behaved” insurance company would soon be flooded with less healthy individuals.

Are the risk adjustment mechanisms in either of the Senate bills better? Unfortunately, the answer is basically no. In both the Senate HELP committee bill and the Senate Finance Committee bill, language dealing with risk adjustment is nearly identical to the House legislation. Both leave the risk adjustment issue completely up to the Secretary of HHS to work out. The Senate Finance Committee bill does establish an additional transitional reinsurance program for the individual market. This reinsurance fund would only stay in place for the first three years. Risk adjustments mechanisms would get worse not better as reform progresses.

On probably the single most important issue determining the success or failure of reform, all three bills are practically silence. It will be the job of the Secretary of HHS to make sure reform does not fail do to adverse selection.

The Swiss health care system has taken several steps beyond what any of the US bills have proposed to reduce discrimination and gaming of the system. It has a highly standardized, mandatory, basic benefits package, and all health insurance companies that sell the basic benefit packages must be non-profits. All insurers, except managed care plans, must pay uniform reimbursement rates to providers. Still, in a given area of Switzerland, there can be a dramatic difference in the cost of premiums. The Commonwealth Fund concluded:

For the year 2005, for example, the difference between the lowest and highest premium for coverage in Zurich with a 300 CHF ($255) deductible is 89 percent (BAG 2007). This situation can only persist over time because, despite periodic open enrollment, relatively few individuals change insurer from year to year. Nearly all the difference in premiums appears to be attributable to risk selection not adequately compensated for in the risk equalization system.

Despite some risk adjustment mechanisms, standardized benefit packages, regulation against discrimination, uniform provider reimbursement, being non-profits, etc., the Swiss health insurance companies have not stopped trying to game the system. Timothy Stoltzfus Jost, Professor at Washington and Lee University wrote,

Swiss insurers have become exquisitely adept at risk selection, even though it is technically illegal and to some extent disincentivized by a risk pooling program. Insurers, for example, offer multiple policies and steer high cost insureds to higher cost policies and low cost insureds to lower-cost policies. Insurers commonly offer attractive deals on supplemental health coverage, life insurance, or other forms of insurance which they can risk underwrite to attract lower risk insureds. Insurers use high deductible policies and policies for which no-claims rebates are available to woo low risk insureds. There are reports of insurers closing offices in high-claims areas and of using software to identify unprofitable insureds or applicants so that they can ignore inquiries and contacts from them. There is considerable evidence that virtually all of the competition among Swiss health insurers to date has been based on risk selection. Premiums in the Switzerland vary dramatically from one policy to another, yet switching of insurers is relatively uncommon, often because insureds have other forms of insurance with insurers and are reluctant to switch.

I'm truly frightened by the possible ramifications that potentially insufficient (and currently completely undefined) risk adjustment mechanisms will have on our health care system after reform. Our system will rely heavily on for-profit insurance corporations, and they would be given much greater flexibility in tailoring insurance plans to discourage enrollment by less healthy (unprofitable) customers compared to Switzerland. It will be a system much easier to game, dominated by entities with huge incentives to skirt regulation. Obama current refusal to truly take on the health insurance industry does not fill me with hope that his Secretary of HHS will design and/or strongly enforce the regulations and robust risk adjustment programs necessary to make a “managed competition” health insurance system work.

Why You Might Never Get Quality Affordable Health Insurance: The Dangerous Lack Of Robust Risk Adjustment

Yesterday, I drew attention to the CMS's findings about the House's robust public option tied to Medicare rates. There were two important findings: The first was that it would be 18% cheaper to insure someone with a robust public option. The second was that premiums for people who chose the public option would only be about 11% cheaper. The problem: the lack of strong enough risk adjustment mechanisms or reinsurance program on the new exchange. People with serious medical issues are the ones most likely to be diligent shoppers on the new exchange. A good health insurance plan with lower overhead and a large provider network (like a robust public option) will attract these less healthy individuals. This shift of sicker people to better, well-run health insurance plans will drive up their premiums. The House bill does contain risk adjustment mechanisms for the exchange to protect against adverse selection, but the CMS determined that would be insufficient.

Fortunately, the robust public option tied to Medicare rates would be so much better than private insurance. It could absorb this consumer shifting and still provide insurance with substantially lower premiums. It would start with real market clout and could have an important impact.

If the exchange did not have a robust public option (or had only a very weak one), the lack of a sufficient risk adjustment becomes an even more serious concern. The result is that it would be impossible for an insurance company to ever offer high quality, low cost insurance even if they wanted to.

Let's assume some non-profit insurance company (maybe one of the new co-ops Conrad is pushing) really tried to offer a low hassle, low cost, high quality insurance package. Word would soon get around to individuals with costly medical problems. They would flock to this better plan and drive up its premiums. Every attempt to cut waste and pass on savings to consumers would be eaten up by more adverse selection.

Bad insurance companies that treated their sicker customers poorly would be the ones reaping the benefits from the good behavior of socially responsible insurance companies. The bad insurance companies with bureaucratic hassles would try to drive all their unprofitable consumers to socially responsible companies. That would leave the bad insurance companies with just high profit, healthy individuals. It is a vicious cycle that would make it nearly impossible for groups to create a large, well-functioning, socially responsible, private health insurance company, even if they wanted to.

Based on my research, none of the bills currently before Congress have robust enough risk adjustment mechanisms and/or the necessary regulations in place to discourage adverse selection. Other "market based" health care systems (Switzerland, Netherlands, Germany) in the world use a much stronger risk adjustment mechanism and have a much tighter definition of what minimum insurance every company must provide.

My worry is not just that without a public option people are unlikely to have the choice of a quality, low-cost health insurance option. I don't just think it is only improbable that insurance companies will choose to act more socially responsible, my real concern is that the new loosely regulated exchange will be a marketplace where it is simply impossible to offer a high quality, low cost, socially responsible, private insurance plan.

It is not just unlikely that current health care reform bills, without a public option, will fail to provide millions of more people with quality affordable private health insurance--I fear such reform will make it impossible to them to get quality affordable health insurance.